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Hi Sir,
I was going through the December 2012 question, Arbore. The question says cash flows from year 4 for a period of 15 years. So, it’s taken as 4-18 years. In the calculation of The Df, they have taken the annuity of year 15 and multiplied it with 1/1.11^3. Is it because it is 15 + 3 years? Also, just in case if we’ll have to calculate a Df from say, year 4 to 20, do we take the Annuity of year 15 and multiply it by 1/1.11^5? Just because it is 5 years after year 15?
Thanks!
We use the 15 year annuity factor because there are 15 years of flows.
We then discount for 3 years because they annuity starts 3 years late (it starts at time 4 instead of at time 1).
If it was from 4 to 20, then there are 17 years of flows. So we would multiply by the 17 years annuity factor and then discount for 3 years (for the same reason as above).
I do suggest that you watch my free Paper MA (was F2) lectures on basic discounting, where I go through discounting for examples such as this.
Thanks a lot sir. I got the point now. Will also go through the F2 lectures to get a better clarity.
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